Fad et al v. L'Oreal USA, Inc. et al
Filing
170
OPINION & ORDER: that plaintiffs' 7/8/2011 motion for class certification is denied. A scheduling order to govern the remainder of the case shall follow this opinion. (Signed by Judge Denise L. Cote on 9/14/2011) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
:
SALON FAD, et al.,
:
Plaintiffs,
:
:
-v:
:
L’OREAL USA, INC., CONAIR CORPORATION, :
FAROUK SYSTEMS, INC., JOHN PAUL
:
MITCHELL SYSTEMS, SEXY HAIR CONCEPTS,
:
LLC, THE PROCTOR AND GAMBLE COMPANY,
:
and TIGI LINEA, LP,
:
Defendants.
:
:
----------------------------------------X
10 Civ. 5063 (DLC)
OPINION & ORDER
Appearances:
For Plaintiffs:
James T. Southwick
Richard W. Hess
Nabeel H. Peracha
Susman Godfrey LLP
1000 Louisiana Street
Suite 5100
Houston, TX 77002
Suyash Agrawal
Susman Godfrey LLP
560 Lexington Avenue, 15th Floor
New York, NY 10022
For Defendant L’Oreal USA, Inc.:
Frederick Burdett Warder III
Harry S. Clarke III
Scott Caplan
Paterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
For Defendants Conair Corporation and TIGI Linea, LP:
Lewis Richard Clayton
Jaren Elizabeth Janghorbani
Scott Jonathan Sholder
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019
For Defendant John Paul Mitchell Systems:
John A. Furutani
Furutani & Peters, LLP
350 W. Colorado Blvd. Suite 200
Pasadena, CA 91105
Michaeline A. Re
Law Offices of Michaeline A. Re
350 W. Colorado Blvd. Suite 200
Pasadena, CA 91105
Robert P. Knapp III
Mulholland & Knapp, LLP
641 Lexington Avenue, 20th FLoor
New York, NY 10022
For Defendant The Proctor and Gamble Company:
Eileen Miriam Patt
Harold Paul Weinberger
Norman Christopher Simon
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036
DENISE COTE, District Judge:
This case concerns whether hair care products
manufacturers’ labeling of their products as available
exclusively in salons results in lost sales and damage to the
reputation and goodwill of the salons that carry those products.
The plaintiffs move for class certification pursuant to Rules
23(a), (b)(3), and (b)(2), Fed. R. Civ. P.
reasons, the motion is denied.
2
For the following
BACKGROUND
The defendants are manufacturers of hair products which
they market and sell to salons under their respective brands.
The plaintiffs are salons which sell the defendants’ hair
products.
Sales of hair care products represent an important
revenue source for salons; indeed, the profit margin on these
products is generally higher than the margin for the hair care
services provided in the salons.
The first amended class action complaint (the “Complaint”)
asserts three causes of action:
false advertising and unfair
competition under the Lanham Act, and injunctive relief.
The
Complaint alleges that the defendants each represent, through
their product labels, on company websites, and in print
advertisements, that their hair care products are available for
purchase exclusively through salons and not through mass-market
retailers such as CVS and Walgreens.
According to plaintiffs,
although the defendants maintain that they offer their products
exclusively through salons, since at least 2004 the defendants
have engaged in widespread diversion of their products to mass
retailers.
“Diversion” here is defined as the sale of products
marketed as salon-only through stores that do not have salons on
the premises.
Diversion now accounts for “more than $1 billion
of the beauty industry’s $5 billion in annual sales of salononly products.”
Plaintiffs contend that the defendants’ false
3
“salon-only” advertising damages their reputation with consumers
who purchase products at their salons, only to discover that the
products are also available at mass retailers.
The plaintiffs seek to certify a class for each of five
defendants,1 consisting of
[A]ll professional hair salons and licensed cosmetologists
that purchased [a defendant’s] professional products for
resale to their customers within the United States from
July 1, 2004, to the present. Excluded from the class are
any salons [a defendant] previously identified as having
diverted [its] professional products during the class
period.
The primary reason that this motion to certify a class fails is
the unresolved tension between the legal claims brought by the
plaintiffs and their theory of damages.
While the claims
emanate from a theory of false advertising, the plaintiffs’
evidence of damage arises from the phenomenon of diversion and
not from any false advertising.
As a consequence, the
plaintiffs have failed to satisfy the requirements for pursuing
their claims as representatives of a class.
1
The Court severed the claims against defendant Farouk Systems,
Inc. (“Farouk”) and transferred them to the Southern District of
Texas by Order of February 1, 2011. On February 14, 2011, the
Court stayed the claims against defendant Sexy Hair Concepts,
LLC (“Sexy Hair”), Sexy Hair having filed for bankruptcy.
Accordingly, the plaintiffs do not seek to certify classes with
respect to these two defendants.
4
A.
The Defendant Hair Care Product Manufacturers
Defendant L’Oreal USA, Inc. (“L’Oreal”) manufactures and
sells several lines of hair and skin care products, including
the Matrix, Kerastase, Redken, and Pureology lines of products.
Prior to 2011, Matrix products were labeled “For sale only in
professional beauty salons.”
Kerastase products are labeled
“For professional use only”; Pureology products advise that they
are “Available Only at Fine Salons and Spas.”
A sample
distribution contract between L’Oreal’s distributor and a salon
notes that diversion damages L’Oreal’s goodwill with consumers.
The contract provides for liquidated damages in the amount of
$100 per unit of L’Oreal product diverted by the salon.
Defendant TIGI Linea, LP (“TIGI”) manufactures and sells
the Bed Head line of hair products.
Bed Head products are
labeled as “Sold Only in Professional Salons.”
Defendant Conair Corporation (“Conair”) manufactures and
sells the Rusk premium line of hair care products.
Rusk
products contain the label “Sold exclusively in professional
salons.”
Defendant John Paul Mitchell Systems (“Paul Mitchell”)
manufactures and sells the Paul Mitchell line of hair care
products.
The packaging of these products contains the
following warning:
“Guaranteed only when sold by a professional
hairdresser, otherwise it may be counterfeit, black market, and
5
or tampered with.”
Paul Mitchell advertisements in magazines
advise readers that products are available “Only in salons and
Paul Mitchell schools.”
A sample contract between a Paul
Mitchell distributor and a salon states that diversion
“seriously damages the reputation and good will established by
[Paul Mitchell] and the Distributor and interferes with their
business relationship with other SALON customers as well as the
consumer.”
The contract provides that the distributor or Paul
Mitchell shall be entitled to at least $25,000 in liquidated
damages for any diverted products.
Defendant The Wella Corporation (“Wella”)2 manufactures the
Sebastian line of products, which are labeled “Guaranteed only
when sold by an authorized salon.”
A sample contract between
Wella and a salon for the distribution of Wella hair care
products provides that diversion “damages Wella’s brands,
trademarks, and goodwill and damages its contractual relations
with its distributors and other salon customers.”
Wella’s
contract also provides for liquidated damages in the event that
the salon is found to be diverting Wella products.
2
Wella was improperly sued by the plaintiffs as The Proctor and
Gamble Company (“P&G”). Wella is a wholly-owned subsidiary of
P&G; it is the owner of the Sebastian trademark and the
distributor of the Sebastian products, which are the products
that form the basis of the plaintiffs’ allegations against Wella
in this suit.
6
B.
The Plaintiff Salons
The plaintiffs are a group of salons located in Georgia and
Alabama, as well as a non-profit organization founded to address
the problem of diversion of hair products to mass retailers.
1.
Salon FAD
Salon FAD is a non-profit organization founded by Linda
Pelfrey (“Pelfrey”) in 2008 to “advance the interests of salons
in the face of the large-scale diversion of professional
products into non-professional retail channels.”
for “Fight Against Diversion.”
“FAD” stands
Pelfrey is also the owner of J
Beverly Hills of Georgia, a company that distributes the J
Beverly Hills line of professional hair care products.
Salon FAD is the assignee of the claims of the Daily Trends
salon in Georgia.
Daily Trends has in the past sold the Bed
Head line of products, which are manufactured by TIGI.
2.
Cindy’s Hair Salon
Plaintiff Cindy’s Hair Salon (“Cindy’s”) is owned by Cindy
Poss (“Poss”) and is located in Augusta, Georgia.
Poss
testified that Cindy’s has sold the L’Oreal product lines Matrix
and Redken.
When asked to explain how diversion harms her
salon, Poss stated that “I feel like the products are sitting on
7
my shelf more than what they used to be” and that for this
reason she had had a harder time paying rent and utilities.
3.
Chu’s Hair Salon
Plaintiff Chu’s Hair Salon (“Chu’s”) is located in
Columbus, Georgia and owned by Hyon Chu Jarmon (“Jarmon”).
Chu’s sells hair products manufactured by L’Oreal, TIGI, Paul
Mitchell, and Wella.
Jarmon testified that she stopped
purchasing several hair care lines when she learned that they
were also sold by mass retailers.
Jarmon explained that she
“will lose profit” and that her “reputation not good” with
consumers because of diversion.
Jarmon estimates that she has
lost 15% of her customers because she no longer carries certain
lines of diverted products.
4.
Carastro & Company Hair Design
Plaintiff Carastro & Company Hair Design, a Marietta,
Georgia salon owned by Sheri Carastro and Dr. Lawrence Carastro
(“Dr. Carastro”), has at one time sold L’Oreal, Conair, TIGI,
Paul Mitchell, and Wella products.
Dr. Carastro testified that
diversion harms his salon “monetarily” and that his customers
have started to lose confidence in him and accuse him of being a
“rogue salesman.”
8
5.
EnV Studio Salon LLC
Plaintiff EnV Studio Salon LLC (“EnV”), a salon located in
Roswell, Georgia and co-owned by Gena NeSmith, sells L’Oreal,
TIGI, and Paul Mitchell products.
According to NeSmith,
diversion harms her salon due to lost profits and lost
“credibility” with customers.
NeSmith testified that she is
“offering [her customers] exclusive products in my salon and
when they find it somewhere else, it is not exclusive to them
any longer.”
6.
New Millennium Salons L.L.C. d/b/a Salon 2000
New Millennium Salons L.L.C. d/b/a Salon 2000 (“New
Millennium”), a Milledgeville, Georgia, salon, sells L’Oreal,
Wella, Conair, and TIGI hair products.
New Millennium’s owner,
Linda Marrow, testified that at least one of her customers had
complained about diversion when she purchased a product at New
Millennium that she later discovered on the shelves of a mass
retailer.
Marrow acknowledged, however, that the customer had
continued to patronize the salon with the same frequency after
complaining about diversion.
7.
Salon 1325
Salon 1325 is a Stockbridge, Georgia salon owned by Brenda
Liston (“Liston”).
Salon 1325 sells L’Oreal and Paul Mitchell
9
products.
Liston testified that diversion “is going to reduce
our profits, it is also going to harm our reputation,
credibility, stylists’ relationship with the client.”
8.
Sassy & Classy Salon and Spa
Sassy & Classy Salon and Spa (“Sassy”) is located in Grey,
Georgia and is owned by Shana Wood (“Wood”).
Sassy sells
products manufactured by the following defendants:
Paul Mitchell, TIGI, Well, and Conair.
L’Oreal,
Wood testified that she
had never had a client who had stopped patronizing Sassy after
discovering products sold at Sassy on the shelves of mass
retailers.
9.
The Works Hair and Nail Salon
Plaintiff The Works Hair and Nail Salon (“The Works”) is a
Centre, Alabama salon owned by Kathy Elrod (“Elrod”).
sells L’Oreal, TIGI, and Conair products.
The Works
Elrod testified that
the defendants’ allegedly false advertising harms her business
in that it “kind of makes [her customers] wonder, you know, of
everything I have told them.”
10
10.
The Veranda Salon and Spa, Inc.
Plaintiff The Veranda Salon and Spa, Inc. (“Veranda”) is a
Kathleen, Georgia salon owned by Kelley Cretors.
Veranda sells
or has sold L’Oreal, Paul Mitchell, and Wella products.
11.
The William David Salon
Plaintiff The William David Salon is located in Alpharetta,
Georgia and is owned by William Murphy (“Murphy”).
The William
David Salon sells both L’Oreal and Wella hair products.
Murphy
testified that diversion “was a lie, it damaged my business
because they both lied to me, by lying to me it ruined my
integrity, it ruined my brand worth and on top of it, I could
not compete.”
C.
Procedural History
Plaintiffs filed their original complaint on July 1, 2010.
The original complaint asserted claims for false advertising and
unfair competition under Section 43(a) of the Lanham Act, 15
U.S.C. § 1125(a), but did not assert a claim for injunctive
relief.
Each of the seven defendants filed individual motions
to dismiss on August 20.
Plaintiffs subsequently amended their
complaint on September 10 to add a claim for injunctive relief
under 15 U.S.C. § 1116(a).
On September 23, defendant John Paul
Mitchell Systems filed a motion to dismiss the plaintiffs’
11
amended complaint.
On September 24, defendants L’Oreal, Conair,
Sexy Hair, P&G, Farouk, and TIGI also filed motions to dismiss
the amended complaint.
The defendants argued in their motions to dismiss that any
injury identified by plaintiffs in their complaint was
attributable to diversion and not to the “salon-only”
advertising on the defendants’ products.
The plaintiffs
countered that they were identifying an injury distinct from
that due to the availability of the defendants’ products through
other channels.
According to plaintiffs,
[b]y falsely advertising that their products are
available for purchase only in salons or affiliated
with salons, Defendants threaten the goodwill that
Plaintiffs have built with their customers as
providers of professional products. This loss of
goodwill and sullied reputation threaten Plaintiffs
because their customers may choose not to purchase
products at Plaintiffs’ salons or purchase fewer
products and services at those salons.
By Opinion and Order of January 10, 2011, the Court denied the
defendants’ motions to dismiss the amended complaint.
See Salon
FAD v. L’Oreal USA, Inc., No. 10 Civ. 5063 (DLC), 2011 WL 70591,
at *6 (S.D.N.Y. Jan. 10, 2011).
The Court found that the
plaintiffs had alleged a “plausible” theory of injury, namely
that “their reputation is damaged because customers associate
the ‘salon-only’ advertising with the salons and therefore may
stop patronizing the salons when they discover the falsity of
the advertising.”
Id. at *3.
The Court held that the
12
plaintiffs “alleged the existence of a causal connection between
the false advertising and the injury to their reputation”
sufficient to satisfy both Article III constitutional standing
and the prudential standing requirement under the Lanham Act.
Id. at *4.
At a conference on February 3, 2011, the Court ordered
bifurcated discovery on the motion for class certification.
Class certification discovery was completed on June 17.
The
plaintiffs moved for class certification on July 8; the motion
was fully submitted on August 26.
Discussion
A.
Requirements for Class Certification
“[A] district judge may not certify a class without making
a ruling that each Rule 23 requirement is met.”
McLaughlin v.
Am. Tobacco Co., 522 F.3d 215, 221 (2d Cir. 2008) (citation
omitted).
Thus, the plaintiffs will be able to sue the
defendants as representatives of a class
only if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions of law or
fact common to the class, (3) the claims or defenses of the
representative parties are typical of the claims or defenses
of the class, and (4) the representative parties will fairly
and adequately protect the interests of the class.
Rule 23(a), Fed. R. Civ. P.; see Brown v. Kelly, 609 F.3d 467,
475 (2d Cir. 2010).
“What matters to class certification is not
13
the raising of common ‘questions’ -- even in droves -- but,
rather the capacity of a classwide proceeding to generate common
answers apt to drive the resolution of the litigation.
Dissimilarities within the proposed class are what have the
potential to impede the generation of common answers.”
Wal-Mart
Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011) (citation
omitted).
If the Rule 23(a) criteria are satisfied, an action
may be maintained as a class action only if it also qualifies
under at least one of the categories provided in Rule 23(b).
Rule 23(b), Fed. R. Civ. P.; Brown, 609 F.3d at 476.
In this case, plaintiffs seek to certify a class under Rule
23(b)(3) or, in the alternative, under Rule 23(b)(2).
Rule
23(b)(3) permits certification “if the questions of law or fact
common to class members predominate over any questions affecting
only individual members, and . . . a class litigation is
superior to other available methods for fairly and efficiently
adjudicating the controversy.”
Brown, 609 F.3d at 476.
Rule 23(b)(3), Fed. R. Civ. P.;
Rule 23(b)(2) permits class
certification if “the party opposing the class has acted or
refused to act on grounds that apply generally to the class, so
that final injunctive relief or corresponding declaratory relief
is appropriate respecting the class as a whole.”
Fed. R. Civ. P.
14
Rule 23(b)(2),
“In evaluating a motion for class certification, the
district court is required to make a ‘definitive assessment of
Rule 23 requirements, notwithstanding their overlap with merits
issues,’ and must resolve material factual disputes relevant to
each Rule 23 requirement.”
Brown, 609 F.3d at 476 (quoting In
re Initial Pub. Offering Sec. Litig., 471 F.3d 24, 41 (2d Cir.
2006) (“In re IPO”)).
“The Rule 23 requirements must be
established by at least a preponderance of the evidence.”
Brown, 609 F.3d at 476 (citation omitted).
In other words, the
district judge must “receive enough evidence, by affidavits,
documents, or testimony, to be satisfied that each Rule 23
requirement has been met.”
Teamsters Local 445 Freight Div.
Pension Fund v. Bombardier, Inc., 546 F.3d 196, 204 (2d Cir.
2008) (citation omitted).
The burden of proving compliance with
all of the requirements of Rule 23 rests with the party moving
for certification.
In re IPO, 471 F.3d at 40.
The defendants contend that the plaintiffs have not
satisfied the commonality and typicality requirements; that
Salon FAD in particular is not an appropriate representative of
the class; and that the class is not sufficiently ascertainable.
Many of these arguments, which are addressed to the Rule 23(a)
criteria, arise again in the defendants’ arguments that the
plaintiffs have not shown that any common issues will
predominate over those requiring individualized proof or that
15
there is a group-wide injury to be addressed here.
Because the
motion for certification so clearly fails the criteria set forth
in Rule 23(b)(3) and Rule 23(b)(2), it is unnecessary to address
the parties’ debate regarding the Rule 23(a) criteria.
B.
Rule 23(b)(3) Predominance
“As a general matter, the Rule 23(b)(3) predominance
inquiry tests whether proposed classes are sufficiently cohesive
to warrant adjudication by representation.”
476 (citation omitted).
Brown, 609 F.3d at
The predominance requirement is met
only “if the plaintiff can establish that the issues in the
class action that are subject to generalized proof, and thus
applicable to the class as a whole, predominate over those
issues that are subject only to individualized proof.”
Id. at
483 (citation omitted); see also McLaughlin, 522 F.3d at 222.
While a plaintiff need not show the “exclusivity” of common
questions, it must show their predominance.
F.3d at 231 (citation omitted).
McLaughlin, 522
The requirement that the court
conduct a “rigorous analysis” to ensure “actual, not presumed
conformance” with the Rule 23 requirements applies with “equal
force to . . . those set forth in Rule 23(b)(3).”
471 F.3d at 33 n.3.
Section 43(a) of the Lanham Act provides
16
In re IPO,
Any person who, on or in connection with any goods
or services . . . uses in commerce any word, term,
name, symbol, or device, or any combination thereof,
or any false designation of origin, false or
misleading description of fact, or false or
misleading representation of fact, which—
(a) is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation,
connection or association of such person with
another person, or as to the origin, sponsorship,
or approval of his or her goods, services, or
commercial activities by another person, or
(b) in commercial advertising or promotion,
misrepresents the nature, characteristics,
qualities, or geographic origin of his or her or
another person’s goods, services, or commercial
activities,
shall be liable in a civil action by any person who
believes that he or she is likely to be damaged by
such act.
15 U.S.C. § 1125(a).
To prove a false advertising claim under the Lanham Act,
a plaintiff must demonstrate that (1) the defendant
made a false or misleading description of fact or
representation of fact in a commercial advertisement
about his own or another's product; (2) the
misrepresentation is material, in that it is likely
to influence the purchasing decision; (3) the
misrepresentation actually deceives or has the
tendency to deceive a substantial segment of its
audience; (4) the defendant placed the false or
misleading statement in interstate commerce; and (5)
the plaintiff has been or is likely to be injured as
a result of the misrepresentation, either by direct
diversion of sales or by a lessening of goodwill
associated with its products.
Cashmere & Camel Hair Mfs. Institute v. Saks Fifth Ave., 284
F.3d 302, 310-11 (1st Cir. 2002); see also S.C. Johnson & Son,
Inc. v. Clorox Co., 241 F.3d 232, 238 (2d Cir. 2001).
17
As in McLaughlin, proof of actual injury in this case “is
bound up in proof of damages, or by how much plaintiffs have
been harmed.”
McLaughlin, 522 F.3d at 227.
At the class
certification stage, plaintiffs may demonstrate that these
elements are susceptible to generalized proof by disclosing a
suitable methodology.
See, e.g., Fogarazzo v. Lehman Bros.,
Inc., 263 F.R.D. 90, 106-07 (S.D.N.Y. 2009); Lapin v. Goldman
Sachs & Co., 254 F.R.D. 168, 186 (S.D.N.Y. 2008); In re Alstom
SA Secs. Litig., 253 F.R.D. 266, 281 (S.D.N.Y. 2008).
When
plaintiffs attempt such a showing, however, they must
demonstrate that the proposed methodology can be applied classwide and “that they could, at trial, marshal facts sufficient to
permit them to rely upon” the proposed methodology.
522 F.3d at 229.
McLaughlin,
Like any component of a Rule 23 requirement,
the court must “assess all of the relevant evidence admitted at
the class certification stage,” including expert testimony, and
determine whether it sufficiently supports a showing of
predominance.
In re IPO, 471 F.3d at 42.
The plaintiffs’ theory of causation and damage rests on the
contention that their customers read the labels on the
defendants’ products, find the representations about those
products being exclusively available in salons material, come to
believe that the representations are false, attribute the false
labeling to the salons, and decide to act on that knowledge and
18
belief in a way that harms the salons.
While it has been
assumed for the purpose of this motion practice that the
labeling is false and that widespread diversion exists, the
defendants concede little else.
The defendants contend that
beyond these two facts there are a host of individual issues
which prevent these Lanham Act claims from being pursued through
the class action vehicle.
They emphasize that the plaintiffs
will be unable to show that the defendants’ advertising on
product labels, even if false, played any role in a consumer’s
decision to patronize a salon or hair stylist.
As the defendants point out, it is difficult to imagine how
there could be class-wide proof of causation and injury.
How
salon customers would react to learning that a product which was
advertised as exclusively sold in salons was also available in
another retail environment is inherently an individualized
question.
To some consumers, it may be of little significance
that the product is also available outside of the salon, unless
of course it could be acquired more cheaply in a general retail
establishment.
Even if a consumer were affected by the
discovery of false labeling and also came to conclude that the
salon was implicated in the deception, whether and to what
extent that leap of association would affect the consumer’s
loyalty to the salon would necessarily depend on a multitude of
factors.
A consumer may feel that he or she has no convenient
19
or less expensive alternative to purchasing the products in the
salon, may have a strong loyalty to the salon or stylist that
outweighs any concern about the false labeling, or may find that
every convenient salon is similarly tainted.
Alternatively, a
consumer may choose to follow a stylist to a new salon, or to
change salons for a host of reasons that have nothing to do with
the false labeling at issue here.
Thus, as defendants posit, it
is difficult to imagine how the false advertising claim could
properly be pursued through the class action vehicle.
In an effort to meet this burden, plaintiffs have offered a
methodology for establishing the crucial element of injury, and
thus damages.
They have offered a skeletal expert report of Dr.
Paul H. Rubin, an economics professor at Emory University.
Dr.
Rubin identifies three different harms that the plaintiff salons
could have suffered as a result of the defendants’ advertising:
(1) reduction in sales of the defendants’ hair products; (2)
harm to the salons’ goodwill and reputation because “customers
who learn of the diversion cannot disentangle the behavior of
the Defendants (in diverting products) from those of
Plaintiffs”; and (3) wasted costs to the salon from advertising
diverted products when they could have advertised non-diverted
products.
Dr. Rubin proposes to measure the reduced demand for
20
the defendants’ products using regression analysis.3
His model
would estimate the salons’ lost profit share in the defendants’
hair care products that is directly attributable to the
defendants’ diversion of those products to mass retailers.
Dr. Rubin’s model fails to distinguish between harm to the
salons caused by the act of diversion, and harm caused by the
defendants’ false advertising, which is the relevant harm here.
The salons’ sales of the defendants’ products may have declined
either because:
(1) consumers stopped patronizing the salons
because they associated the false advertising with the salons
and so took their business elsewhere; or (2) consumers purchased
the defendants’ products at mass retailers for reasons unrelated
to the false advertising, such as lower price or greater
availability.
Dr. Rubin’s model does not distinguish between
lost sales due to a reputational harm from the false
3
Dr. Rubin asserts that he was unable to actually perform the
regression analysis because he did not have access to the
necessary data from the defendants on the amount of diverted
sales and total sales of hair products for each defendant.
During a March 1, 2011 telephone conference with the Court, the
defendants represented that they would not challenge the falsity
of the advertising on their products or the existence of
diversion for the purpose of the class certification motion.
Instead, defendants asserted that they would challenge
plaintiffs’ satisfaction of the adequacy, typicality, and
predominance requirements. The Court therefore ruled that it
would not require the defendants to produce sales data for the
products sold by the salons for the purpose of discovery on the
class certification motion.
21
advertising, and lost sales due to other factors unrelated to
the false advertising.
Dr. Rubin separately asserts that injury to the reputation
and goodwill of the salons can be measured by consumer surveys
and by the liquidated damages clauses contained in the
distributorship contracts with the salons.
Dr. Rubin has not
conducted a consumer survey to gauge reputational harm, however,
nor does he set forth a proposed methodology for conducting such
a survey.
The liquidated damages clauses suffer from the same
flaw as the regression model:
the damages do not distinguish
between harm from diversion of products and harm from false
advertising of those products.
Thus, the liquidated damages
clauses in the salons’ distributorship contracts cannot be taken
as any measure of the reputational harm to the salons.
The plaintiffs rely heavily on Dr. Rubin’s proposed model
to rebut the defendants’ contention that proof of harm to the
salons’ reputations requires inquiry into the specifics of each
individual salon.
The plaintiffs assert that harm to reputation
“can manifest itself in lost sales.”
While this may be true,
the plaintiffs have not demonstrated that they are able to
distinguish between lost sales due to reputational harm and lost
sales due to other factors.
The plaintiffs further argue that
the defendants’ “own contracts and public statements repeatedly
state that diversion harms salons.”
22
But again, these statements
refer to the harm caused by diversion; the harm caused by the
“salon-only” advertising -- the harm at issue in the Lanham Act
claims -- is a separate injury.
In addition to the expert report of Dr. Rubin, plaintiffs
offer a consumer survey conducted by Dr. Maronick, a professor
of marketing at Towson University, to establish that the
elements of materiality and causation can be demonstrated with
common proof.
One of the two most common bases for admitting survey
evidence is Rule 803(3), which creates an exception to
the hearsay rule for statements that express a
declarant's state of mind at the time of the
utterance. . . . The great majority of surveys
admitted in this Circuit, including those used in
Lanham Act cases to establish actual confusion or
secondary meaning, fall into this category: they poll
individuals about their presently-existing states of
mind to establish facts about the group's mental
impressions.
Schering Corp. v. Pfizer Inc., 189 F.3d 218, 227 (2d Cir. 1999).
The Second Circuit has held that errors in methodology in
surveys may be so severe that they preclude the admissibility of
the survey at trial under Rule 403, Fed. R. Evid., or may
“properly go only to the weight of the evidence.”
Id. at 228.
The 3,244 female respondents to Dr. Maronick’s survey
represented a “nationwide sample drawn from an internet panel of
individuals who have agreed to participate in internet surveys
on a periodic basis.”
After the sample of 3,244 was randomly
selected, the respondents were asked whether they had ever
23
purchased professional hair products in a salon to determine
whether they qualified to participate in the survey.
Of the
3,244 respondents, only 1,261, or approximately 36%, answered
yes to this question.
Those 1,261 respondents were asked to
identify the brand of products they had purchased, and were then
shown either a print ad or package for that brand that described
the product as being available exclusively in salons.
The
respondents were asked, “Based on what is said or suggested by
the ad/package, where would you expect (brand) hair care
products to be available for purchase?”
select from the following answers:
The respondents could
only in spas or salons, only
in mass retailers, or in both spas and mass retailers.
70% of
respondents answered that the “salon-only” claim suggested that
the product was exclusively available in salons.
The
respondents were also asked whether the “salon-only” claim on
the packaging “suggested anything about the quality” of the
product.
53% said it suggested that the product was of a higher
quality.
Finally, the respondents were asked about their
“reaction” to seeing products on the shelves of a mass retailer
with “salon-only” claims.
Response options included that the
packaging “raised questions” about the following:
“whether the
salon lied to me about the hair care products available in the
salon,” “the truthfulness of the (specific salon-only claim),”
“the quality of other hair products sold in the salon,” and “the
24
expertise of the stylist who recommended (brand).”
38% of
respondents answered that it made them wonder if the salon had
lied, and 60% said it made them question the truthfulness of the
salon.
Dr. Maronick’s survey is riddled with methodological flaws
and fails to support any claim that the salons suffer lost sales
as a result of consumers’ unhappiness with the false advertising
of the products.
The sample size of only 1,261 respondents who
actually purchased hair care products in salons is quite small,
raising doubts about the representativeness of the survey
responses.
The survey’s questions about presumption of quality
from “salon-only” claims are overly suggestive, as are the
questions about presumptions of deception on the part of the
salon from the “salon-only” claims.
Moreover, the survey
respondents were not given the option to respond that they took
nothing away from this claim, or that they blamed the
manufacturer and not the salon.
The plaintiffs argue that their false advertising claim is
amenable to class certification because of the nationwide scope
and uniformity of the advertising at issue.
They point to two
instances in which a district court certified a class involving
misleading product labels for support.
But those cases are
readily distinguishable as the plaintiffs only sought to
associate the advertising in those cases with the product
25
manufacturers.
In Zeisel v. Diamond Foods, Inc., No. C 10-01192
(JSW), 2011 WL 2221113 (N.D. Cal. June 7, 2011), the plaintiffs
challenged as misleading the labeling on packages of the
defendant’s shelled walnut products.
Id. at *2.
Plaintiffs in
Zeisel offered a more straightforward theory of injury than the
one asserted here:
that consumers were mislead by the labeling
into purchasing the walnuts for their asserted health benefits.
The claims in the other case cited by the plaintiffs, In re
Brazilian Blowout Litig., No. 10 Civ. 8452 (JFW) (C.D. Cal. Apr.
12, 2011), were similarly straightforward and involved the
defendants’ “standardized marketing campaign” for a hairstraightening product which allegedly mislead consumers into
thinking that the product was free of formaldehyde.
In both
cases, the defendants were responsible for the false labeling
and the plaintiffs were the consumers.
Here, the consumers who
were allegedly misled by the false advertising are not parties
to the litigation, and the plaintiff class representatives
assert that the consumers associated the false advertising not
with the manufacturers but with the plaintiff salons.
Although
the advertising at issue in all three instances may be
nationwide in scope, plaintiffs have not shown that these two
cases provide much guidance on the class certification issues at
stake here.
26
The plaintiffs next argue that the defendants err in
describing the injury suffered by plaintiffs as merely a
reputational one.
Plaintiffs assert that the proper measure of
injury is lost sales, which can be captured by Dr. Rubin’s
model.
As discussed above, however, Dr. Rubin’s model fails to
isolate the portion of lost sales that is attributable to the
defendants’ false advertising, as opposed to the diversion of
products.
Finally, plaintiffs assert that the defendants’ profits
from the sales of diverted products can serve as an alternate
measure of damages.
While the disgorgement of profits can serve
as an appropriate measure of damages in some instances, see,
e.g., Hester Industries, Inc. v. Tyson Foods, Inc., 160 F.3d
911, 915, 917 (2d Cir. 1998), it fails to address the lack of
class-wide proof of causation here.
The plaintiffs have not
shown that there is any generalized link between the defendants’
profits from diversion and the injury that they have alleged
from the defendants’ false advertising, and the disgorgement of
defendants’ profits does not supply the missing connection.
The plaintiffs have failed to demonstrate that the alleged
injury to the salons’ reputations is susceptible of class-wide
proof.
The motion to certify a class under Rule 23(b)(3) is
therefore denied.
27
C.
Rule 23(b)(2)
The plaintiffs move for certification under Rule 23(b)(2)
in the event that the Court declines to certify a class under
Rule 23(b)(3).
For the following reasons, this motion is also
denied.
“The (b)(2) class action is intended for cases where broad,
class-wide injunctive or declaratory relief is necessary to
redress a group-wide injury.”
Robinson v. Metro-North Commuter
R.R. Co., 267 F.3d 147, 162 (2d Cir. 2001).
When “monetary
relief is requested in tandem with injunctive and declaratory
relief, the court must determine whether the requested monetary
relief predominates over the claims for equitable relief.”
Parker v. Time Warner Entertainment Co., 331 F.3d 13, 18 (2d
Cir. 2003) (noting that the 1966 Advisory Committee note to Rule
23(b)(2) provides that the (b)(2) “subdivision does not extend
to cases in which the appropriate final relief relates
exclusively or predominately to money damages”).
The Second
Circuit has held that in considering a motion for class
certification under Rule 23(b)(2), a district court should
assess whether (b)(2) certification is appropriate
in light of the relative importance of the remedies
sought, given all of the facts and circumstances of
the case. The district court may allow (b)(2)
certification if it finds in its informed, sound
judicial discretion that (1) the positive weight or
value to the plaintiffs of the injunctive or
declaratory relief sought is predominant even though
compensatory or punitive damages are also claimed,
28
and (2) class treatment would be efficient and
manageable, thereby achieving an appreciable measure
of judicial economy.
Although the assessment of whether injunctive
or declaratory relief predominates will require an
ad hoc balancing that will vary from case to case,
before allowing (b)(2) certification a district
court should, at a minimum, satisfy itself of the
following: (1) even in the absence of a possible
monetary recovery, reasonable plaintiffs would bring
the suit to obtain the injunctive or declaratory
relief sought; and (2) the injunctive or declaratory
relief sought would be both reasonably necessary and
appropriate were the plaintiffs to succeed on the
merits. Insignificant or sham requests for
injunctive relief should not provide cover for
(b)(2) certification of claims that are brought
essentially for monetary recovery.
Robinson, 267 F.3d at 164 (citation omitted) (emphasis
supplied).
Rule 23(b)(2) certification is unwarranted here because the
plaintiffs’ claim for injunctive relief is secondary to their
pursuit of money damages for the alleged reputational harm to
the salons caused by the defendants’ advertising.
Several salon
owners testified that they were interested in pursuing the
lawsuit because of the lost sales caused by the defendants’
diversion of their products to mass retailers.
For example,
Poss, the owner of Cindy’s, testified that ““I feel like the
products are sitting on my shelf more than what they used to be”
and that for this reason she had a harder time paying rent and
utilities.
29
Even more troubling, not all plaintiffs agree on the nature
of the injunction to be achieved through this litigation.
Some
plaintiffs desire that the defendants stop advertising their
products as “salon-only.”
Others indicated that the “salon-
only” claims on the defendants’ products contributed to a
feeling of exclusivity that they hoped to foster in their
businesses.
These plaintiffs have more of an interest in
halting the diversion of products than in preventing the
defendants from advertising their products as “salon-only.”
Further contributing to the sense that plaintiffs’ claim
for injunctive relief is merely incidental to their damages
claim is the fact that plaintiffs’ original complaint did not
assert any claim for injunctive relief; this claim was added
when the plaintiffs amended their complaint in response to the
defendants’ motions to dismiss the original complaint.
The
plaintiffs devote a mere two pages of their fifty-two page brief
in support of their motion for class certification to their
request for (b)(2) certification.
In sum, the plaintiffs’ claim
for injunctive relief does not predominate over their claim for
damages.
The motion for certification pursuant to Rule 23(b)(2)
is denied.
30
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